Simply enter the amount of money, initial year, and the final year to see the impact of inflation. You can choose years in the future. This calculator will calculate the inflation from the past to the future and from the future to the past.
The inflation calculator measures the purchasing power of the U.S. dollar over time based changes in the Consumer Price Index (CPI). We use the annual average CPI for all item s in U.S. cities, not seasonally adjusted.
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation (negative inflation), by managing the money supply and interest rates.
In an economy with inflation, prices rise over time. The value of money falls, so each dollar buys fewer goods and services. The purchasing power of a dollar today is less than it was a year ago, and will be worth even less a year from now.
Inflation happens when there’s too much money chasing too few goods. It’s generally caused by central banks printing too much money. When this happens, each unit of currency loses value because it can buy fewer goods and services. The result is higher prices across the economy – known as inflation.
Inflation can also happen when the government imposes price controls on certain items (such as gasoline). This creates artificial shortages of those items, leading to higher prices for consumers. In both cases, inflation erodes the purchasing power of people’s incomes and savings.
There are several ways to measure inflation:
Inflation has both positive and negative effects on an economy:
It encourages spending rather than saving: If people expect prices to rise in future, they will spend rather than save their money today because their money will be worth less in future due to inflation eroding its purchasing power. -It redistributes wealth from savers to debtors: Inflation benefits debtors because it reduces the real value of their debt payments; conversely, it hurts savers because it reduces the real value of their savings.
It increases uncertainty: Inflation creates uncertainty about future price levels, which makes planning difficult for both consumers and businesses. -It discourages investment: High rates of inflation can discourage investment because businesses become uncertain about future profitability. This can lead to lower economic growth in the long run.
The hidden dangers of inflation Inflation is a near certainty. While the U.S. has gone through periods of deflation, on average, inflation has increased by 3.1% per year historically. What does this mean? If hypothetically you are earning 4% in a savings account while inflation is growing at 3%, you are really earning around 1% in terms of real purchasing power.
There have also been times in U.S. history when the inflation rate was in the low teens. In this case, if you are earning say 4% in a savings account and inflation is 12%, then you are actually losing purchasing power by around 7-8%.
Let's look at an example.
You have $100 and you put this in a savings account earning 4%. You are interested in buying a nice chair that also costs $100, but you decide to wait until next year.
Inflation is 12%.
After a year, you now have $104 in your savings account.
However, as a result of inflation, the chair now costs $112.
You are $8 short. This is the power and the danger of inflation.
So how can you protect yourself against inflation and make sure your hard-earned money does not lose its value over time?
Investing in the stock market could help combat rising inflation. While the historical inflation rate has been 3.1%, the average annual return of the S&P 500 has been 10% since 1926 and 8% since 1957. The S&P 500 is a stock market index that measures the performance of 500 large companies listed on U.S. stock exchanges and is a good representation of the U.S. stock market.
Investing in the stock market, whether that is through choosing individual stocks or buying a basket of stocks that track the stock market, such as ETFs, is one way to counter the negative impacts of inflation.
Another way to protect yourself against inflation while avoiding the ups and downs of the stock market is to invest in inflation-protected bonds. The benefit of this is that you avoid potentially losing money in the stock market while still being protected against inflation. The disadvantage is that you miss out on gains in the stock market that are above the inflation rate.
The US Treasury offers Treasury Inflation-Protected Securities, also know as TIPS, for purchase. The principal of these securities increase with inflation (and decrease with deflation), as tracked by the Consumer Price Index.
At minimum, your money should be sitting in a savings account that is earning interest. After all, even a small interest rate is better than no interest rate, which is what happens if your money is being stored in a checking account.
How to calculate the inflation rate The inflation rate is calculated by the U.S. Bureau of Labor Statistics (BLS), which constructs the Consumer Price Index, or CPI.
The CPI measures the cost of purchasing a bundle of items for daily living such as cereal, milk, win, furniture, jewelry, clothing, and more. This index is adjusted over time to account for changes in what people tend to buy in their daily lives.
The inflation rate is defined as the percentage change in the Consumer Price Index. The CPI index number does not matter - what matters is the change in the CPI.
Let's look at an example. How much money would you need in 2019 to buy an item that cost $100 in 1990?
We need to know what the CPI index was in 2019 and 1990.
CPI Index in 2019: 255.657 CPI Index in 1990: 130.7
The formula to calculate the price of a good from one year to another is: